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Multivariate term structure models with level and heteroskedasticity effects

  • Christiansen, Charlotte

The paper introduces and estimates a multivariate level-GARCH model for the long rate and the term structure spread where the conditional volatility is proportional to the y’th power of the variable itself (level effects) and the conditional covariance matrix evolves according to a multivariate GARCH process (heteroskedasticity effects). The conditional long rate variance exhibits heteroskedasticity effects and level effects in accordance with the square-root model. The conditional spread variance exhibits heteroskedasticity effects but no level effects. The level-GARCH model is preferred above the GARCH model and the level model. GARCH effects are more important than level effects.

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Article provided by Elsevier in its journal Journal of Banking & Finance.

Volume (Year): 29 (2005)
Issue (Month): 5 (May)
Pages: 1037-1057

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Handle: RePEc:eee:jbfina:v:29:y:2005:i:5:p:1037-1057
Contact details of provider: Web page: http://www.elsevier.com/locate/jbf

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